The False Promise of Austerity

by Ted P. Schmidt

From 2009 to 2011, riots and massive protests erupted in the so-called PIIGS countries of Europe—Portugal, Ireland, Italy, Greece, and Spain—and these reactions were caused by austerity policies imposed by European Union politicians. The dramatic cuts in government spending and tax increases were not directed at the big banks and elites who caused the global financial crisis, rather they were forced upon the middle class and poor. In the US, excessive government deficits spawned a Tea Party takeover of Congress and our own austerity movement that led to debt-ceiling crises and sequester spending cuts.

Politicians across the globe were telling their citizens that too much debt would cause Greek-like defaults and another recession, and that austerity was the needed cure for what ailed global economies. And how did they know this? An economic study told them.

At the US national economic meetings in January 2010, Harvard economists Carmen Reinhart and Ken Rogoff presented a paper (“Growth in a Time of Debt”) that used historical evidence to show that economic growth would “fall off a cliff” when the ratio of government debt to GDP surpassed 90 percent. Their paper gave politicians like Olli Rehn (vice president of the European Commission) and US Representative Paul Ryan the evidence they needed to push for massive government spending cuts on social programs and tax increases on the middle class, and these policies were given the euphemistic moniker austerity.

But what if the results of the Reinhart-Rogoff paper were wrong? What if austerity was the wrong policy to follow? Was all of the pain and suffering in Europe, and all of the political gamesmanship in Congress, a colossal mistake? That was the suggestion of a paper published about one year ago (April 2013), which set off a global economic feud reminiscent of the Hatfields and McCoys.

As a way to teach economic statistics, Professors Robert Pollin and Michael Ash of the University of Massachusetts Amherst ask their graduate students to replicate existing economic studies. One of their students, Thomas Herndon, was able to convince the Harvard professors to send him their data. Unable to replicate their numbers, he dug into the data and found a basic spreadsheet error. Once corrected, rather than finding average growth was negative when debt/GDP exceeded 90 percent, they found a positive value, just over two percent. Herndon, along with Pollin and Ash, posted these findings (which included additional criticisms of the Reinhart-Rogoff study) on their website in April 2013, and economic bloggers around the globe pounced on it, setting off a global economic brouhaha.

The debate garnered so much public attention that it was covered in a segment on The Colbert Report. The UMass paper helped resurrect the global debate about government fiscal policies, and soon after it appeared the IMF published a study showing that the results of austerity policies were actually causing slower economic growth, especially in Europe. The Herndon, Ash, and Pollin paper had such an impact on the austerity debate that Foreign Policy magazine listed them among “the 100 Leading Global Thinkers of 2013.”

Economist Paul Krugman, one of the lone mainstream voices arguing against austerity over the past five years, had this to say about the UMass paper:

“The point is that the next time Olli Rehn, or George Osborne, or Paul Ryan declares, sententiously, that we must have austerity because serious economists tell us that debt is a terrible thing, people in the audience will snicker—which they should have been doing all along, but now it has become socially acceptable.”

Krugman certainly wasn’t the only economist arguing against austerity. As the austerity hawks in Congress were heating up in 2010 (supported by the RR paper presented in January), I also argued in these pages that it was not the time for fiscal restraint (“Deficit Hysteria,” Artvoice v9n23).

Pollin has also been a leading and ongoing voice against austerity. In 2012 he published Back to Full Employment, a book that describes a progressive agenda for addressing the issues of creating a sustainable full employment economy over the long run, government deficits, reducing the pressures from globalization, immigration and international trade; and the imperative of building a green economy.

Class warfare is alive and well in this country. Fear-mongering over public debt has been used by politicians, elected by funding from Wall Street bankers, to push austerity policies on the middle class and poor, and this has been done to protect the interests of their paymasters, the top one percent (those households who own 35 percent of all wealth and received 95 percent of the income gains from 2009-2012).

So, a word to the wise: Be wary of politicians who base their claims on rigorous academic studies done by the same economists who missed the biggest economic crisis in 80 years; there might just be a spreadsheet error…